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For release on delivery 10 00 a.m E S T March 27, 1996 Statement by Alan Greenspan Board of Governors of the Federal Reserve System before the Committee on the Budget U S. House of Representatives March 27, 1996 I appreciate the opportunity to appear before this Committee once again As you know, I discussed current economic conditions and the outlook rather extensively in appearances before House and Senate Banking Committees just over a month ago Today, I would like to provide a brief update of comments that I made then and reiterate my views on some key issues that are important for our nation's economic prospects over the medium term. A month ago, the economy clearly had been perceived as soft over the latter part of 1995 and early weeks of 1996 There were uncertainties, however, both about the factors that might have given rise to the softness in activity and the degree to which that softness might persist Although not all of the uncertainties have been resolved, recent data have confirmed the expectation that a good bit of the economic sluggishness of late 1995 was related to inventory investment The efforts of businesses to re-establish more desirable relationships between their holdings of inventories and their actual and prospective levels of sales held down production. Toward the end of last year, the inventory adjustments reached a point at which stocks actually were being reduced in the aggregate Although January, with its unusually severe weather, apparently resulted in goods being bottled up for a time in some parts of the economy, the underlying picture, as best we can discern, seems -2to be one in which much, but perhaps not all, of the needed inventory correction already has been accomplished Ultimately, of course, the inventories that businesses want to hold will depend on the growth of final demand At present, there are some factors, such as high consumer debt levels, that still may be working to restrain spending But the recent data seem to indicate that those restraining influences are not so strong as to seriously jeopardize the continued expansion of the economy. Data for February showed increases in sales of motor vehicles and other types of goods that are purchased at retail, and housing starts rose further last month. In the business sector, real outlays for fixed capital still appear to be trending up. The labor market reports for February provided additional evidence that the economy is moving past the disruptions that had slowed it in previous months Payroll employment surged in February, more than reversing the losses of January, and the unemployment rate, after having ticked up in January, dropped back last month It is possible that the February data may have exaggerated the strength of the labor market to some extent, as we've not seen a similar degree of strength in other labor market indicators, such as initial claims for unemployment insurance But even so, the current economic expansion seems to have exhibited staying power The -3strike that has recently affected the motor vehicle industry is likely to result in additional volatility over the near term, but like the disruptions of this past winter, it should not have a great impact on underlying trends in the economy The most recent reports on inflation also have been reasonably encouraging. Price increases at the consumer level have been moderate, on average, in the early part of 1996, and the twelve-month change in the CPI has remained near recent lows. In addition, producer prices have been well-behaved early this year, the prices of finished goods changed little over the first two months of the year, and materials prices in the PPI continued to edge down While monetary policy, as always, will need to be alert to inflation risks as we move forward, the recent economic data suggest that the economy should be able to continue operating at a high level of resource utilization, sustaining growth without risking a reversal of progress that has been made toward the goal of price stability As I noted last month, structural forces may be assisting us in this regard Introduction of new technologies into a wide variety of production processes is affecting production costs and business pricing throughout the economy Successive generations of these new technologies are being quickly embodied in the nation's capital stock, and older -4technologies are, at a somewhat slower pace, being phased out As a consequence, the nation's capital stock is turning over at an increasingly rapid pace, not primarily because of physical deterioration but reflecting technological and economic obsolescence A major challenge that we face during this period of rapid technical change is that of altering, with minimal disruption, not only the existing organizational structures and production methods of firms but, even more important, the skills of the labor force At present, the more rapid advance of information and communications technology and the associated acceleration in the turnover of the capital stock are being mirrored in a brisk restructuring of firms In line with their adoption of new organizational structures and technologies, many enterprises are finding that their needs for various forms of labor are evolving just as quickly In some cases, job skills that were adequate only five years ago are no longer as relevant Partly for that reason, most corporate restructurings have involved a significant number of permanent dismissals It would be neither feasible nor desirable to try to restrain the technical forces that lie behind the huge structural changes that are playing themselves out in the business world and in the workplace But we can take steps -5that will help ease the transition between the old and the new Firms and employees alike need to recognize that obtaining the potential rewards of the new technologies in the years ahead will require a renewed commitment to effective education and training, especially on-the-job training Such a commitment is essential if we are to prevent the disruptions to lives and the nation's capacity to produce that arise from mismatches between jobs and workers We need to improve the preparation for the job market our schools do, but even better schools are unlikely to be able to provide adequate skills to support a lifetime of work Indeed, ensuring that our labor force has the ongoing education and training necessary to compete in an increasingly sophisticated world economy is a critical task for the years ahead Fortunately, economic successes of the past decade or so have put us in a better position to meet the challenges that remain We have made significant and fundamental gains in macroeconomic performance in recent years that enhance the prospects for maximum sustainable economic growth Inflation, as measured by the consumer price index, has been gradually reduced from a peak of more than 13 percent in 1979 to about 2-1/2 percent last year Lower rates of inflation have brought a variety of benefits to the economy, including lower long-term interest rates, a sense of greater economic stability, an -6improved environment for household and business planning, and more robust investment in capital expenditures Hopefully, the years ahead will see further progress against inflation and the eventual achievement of price stability We have also made considerable progress on the fiscal front. Over the past ten years and especially since 1993, our elected political leaders, through sometimes prolonged and even painful negotiations, have been successful in reaching several agreements that have significantly narrowed the budget deficit But more remains to be done As I have emphasized many times, lower budget deficits are the surest and most direct way to increase national saving. Higher national saving would help to reduce real interest rates further, promoting more rapid accumulation of productive capital embodying recent technological advances Agreement is widely shared that attaining a higher national saving rate quite soon is crucial, particularly in view of the anticipated shift in the nation's demographics in the first few decades of the next century As recent events in financial markets seem to have demonstrated, delay in taking meaningful action on the budget comes at a cost Although the backup of long-term interest rates this year surely has been in large part a reflection of an economy on firmer footing than many market participants had thought, long-term rates also have been affected by perceptions in the -7market that priorities may be shifting away from deficit reduction Lower inflation and reduced budget deficits will by no means solve all of the economic problems we face But the achievement of price stability and federal budget balance or surplus will provide the best possible macroeconomic climate in which the nation can address other economic challenges, including those that arise as side effects of the otherwise beneficial and highly desirable process of technological advance
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